SCOTUS 9-0 on arbitration waiver standard.
Much attention is given to the chasm that often exists between the Supreme Court’s rival factions and the divergent views espoused by the Justices, particularly in controversial hot-button issues. (That chasm was especially wide, and that attention reached a fever pitch, over the past week.) But not all cases before the Supreme Court involve such bitter divisions. In late May, the Court reached a 9-0 decision that resolved a split among the circuits in a case involving the Federal Arbitration Act. In an opinion authored by Justice Kagan, the Court held that a party waives her right to arbitration if she acts inconsistently with that right, even in the absence of prejudice to the opposing party. Morgan v. Sundance, Inc., No. 21-328 (U.S. May 23, 2022).
Sundance owned a Taco Bell franchise where Robyn Morgan worked. When Morgan applied for her job, she signed an agreement that required any dispute to be resolved through arbitration. Yet when a problem arose, she ignored that provision, eschewing arbitration in favor of litigation. Thinking that Sundance routinely breached the Fair Labor Standards, she brought a nationwide collective action against Sundance in federal court. Slip Op. at 2. Sundance defended the case, unsuccessfully moving to dismiss the action on a procedural ground, and then filing an answer. The parties tried mediation, but were unable to reach a settlement. To this point, Sundance had not mentioned the arbitration agreement.
Nearly eight months after Morgan filed her suit, however, that changed, as Sundance moved to stay the litigation and compel arbitration. “Morgan opposed the motion, arguing that Sundance had waived its right to arbitrate by litigating so long.” Id. at 3. The Northern District of Iowa applied Eighth Circuit precedent, which provided that a party waives a contractual right to arbitrate if it knows of the right, acts inconsistently with that right, and prejudices the other party. The trial court found that Morgan had been prejudiced, but the Eighth Circuit disagreed, reversed the trial court, and sent the parties off to arbitrate their dispute.
The Supreme Court agreed to hear the case, given a split among the circuits. The Court explained: “Nine circuits, including the Eighth, have invoked ‘the strong federal policy favoring arbitration’ in support of an arbitration-specific waiver rule demanding a showing of prejudice. Two circuits have rejected that rule.” Id. at 4 (footnotes omitted). The Supreme Court agreed with those two circuits.
The Court began its analysis by explaining what it was not deciding. The Court said it was not deciding “the role state law might play in resolving when a party’s litigation conduct results in the loss of a contractual right to arbitrate.” Id. Similarly, the Court avoided the parties’ quarrel “about whether to understand that inquiry as involving rules of waiver, forfeiture, estoppel, laches or procedural timeliness.” Id. Instead, the Court’s inquiry was narrow and focused. Noting that the various Courts of Appeal “have generally resolved cases like this one as a matter of federal law, using the terminology of waiver,” the Court assumed, without deciding, that those Courts “are right to do so.” Id. The sole question considered by the Court therefore was whether courts “may create arbitration-specific variants of federal procedural rules, like those concerning waiver, based on the FAA’s ‘policy favoring arbitration.’” Id. at 4-5 (quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). The Court’s answer was no.
In any other context, federal courts do not consider prejudice when determining whether a right has been waived. Waiver generally occurs when someone internationally relinquishes or abandons a known right. “To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party. That analysis applies to the waiver of a contractual right, as of any other.” Id. at 5.
For over fifty years, beginning with the Second Circuit’s decision in Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968), some circuits took a different approach when asked to consider whether a party had waived a contractual right to arbitrate a dispute. Relying on a strong federal policy in favor of arbitration, those courts concluded that waiver of the right to arbitrate should not be “lightly inferred,” and that mere delay in seeking a stay of litigation—without some resulting prejudice—would not result in a waiver. Id. at 5-6.
The Supreme Court rejected that approach. The strong policy favoring arbitration does not authorize federal courts to invent special procedural rules that give preference to arbitration. To the contrary, that strong policy simply acknowledged “the FAA’s commitment to enforce agreements to arbitrate and to place such agreements upon the same footing as other contracts.” Id. at 6 (quoting Granite Rock Co. v. Teamsters, 561 U.S. 287, 302 (2010)) (internal quotation marks omitted)). Arbitration agreements are as enforceable as any other contract, no more and no less, and courts are not authorized to create rules that favor arbitration over litigation. “The federal policy is about treating arbitration contracts, like all others, not about fostering arbitration.” Id. (citations omitted).
Moreover, “text of the FAA makes clear that courts are not to create arbitration-specific procedural rules,” such as the waiver rule that was before the Court. Id. at 7. Section 6 instructs courts to treat arbitration applications “in the manner provided by law” for other motions, and thus directs courts “to apply the usual federal procedural rules, including any rules relating to a motion’s timeliness.” Id. On remand, the Eighth Circuit’s waiver inquiry must focus on Sundance’s conduct and not that conduct’s effect on Morgan. Did Sundance “knowingly relinquish the right to arbitrate by acting inconsistently with that right?” Id. The Eighth Circuit could also “determine that a different procedural framework (such as forfeiture) is appropriate.” Id. But “it may not make up a new procedural rule based on the FAA’s ‘policy favoring arbitration.’” Id.